Toby Mathis and Jeff Webb of Anderson Advisors like to talk about taxes. It’s a lot of fun for them, and hopefully, it’s educational for you. Do you have a tax question? Submit it to taxtuesday@andersonadvisors
Highlights/Topics:
- We have a vacation rental that we’re rehabbing. Should we form an LLC to collect rents? Don’t put your rental in your corporation; if you take it out, it’s considered wages
- If the rental is an LLC and you want to flow it to the corp, isn’t that contribution LLC to corp? No. If you want the money to go to the corp, you’re paying in a management fee
- I’ve taken real estate training and investing using my LLC’s credit card. Can I deduct those courses? If it’s a new business, no; if it’s an existing business, yes
- Travel Meals: If included in lodging, is it 50% or 100%? Depends on how you’re billed for travel; if items aren’t separated out on a bill, they’re 100% deductible
- How much can someone loan or gift to you in a single year and it not be a taxable event? $15,000 a year per recipient; if it’s more than that, you have to file a gift tax return
- I’m a self-employed life insurance agent and want to wholesale properties. How should I structure both businesses? Licensed agent is an S Corp; wholesaling is an S or C Corp
- How does the process change, if the rental LLC is owned by a Qualified Retirement Plan? It can’t be a second/vacation house because you’re a disqualified party as a QRP
- Is this LLC with rental and income qualify for the 20% pass through? If real estate is triple-net lease, it doesn’t qualify for 199A; if not triple-net, you get the 20%
- My condo’s roof has a bad leak, and it took 8 months to fix it, during which it couldn’t be rented. Can I declare it as a rental for the entire year? Yes
- If I buy a house subject to rent it out, does the income on the property go toward my person or business? The personal owner, unless you put it in the LLC
- I manage 10+ single-family houses. Can I deduct 100% of cell phone and Internet expenses? If through a corporation, then yes; if sole proprietor, write off business portion
- What if you loan money to your LLC, is there imputed interest? You can’t impute interest to yourself; but if it’s a separate taxpayer, then you have imputed interest
- What if I rent a hotel or Airbnb when I’m looking for an investment property? Set up a corporation to write off those types of expenses
- Can you deduct food expense when going to a cafe to do office work on your laptop? If it’s your business, yes; if going there to do office work on your laptop, it’s not deductible
- Our mom’s condo was put into three siblings names. We sold it. Should we put it in a trust? You should have kept it the mom’s name to pass it on with a step-up-in basis
- We would like to own a house in Florida, but keep our house in Georgia. Tax wise, which is better for a home-based business? No income tax with a home jurisdiction of Florida, and you don’t have any ALS tax
For all questions/answers discussed, sign up to be a Platinum member to view the replay!
Resources
Woody v. Comm, T.C. Memo. 2009-93
Anderson Advisors Tax and Asset Protection Event
Full Episode Transcript:
Toby: Hey good evening everybody or afternoon depending on where you’re at this is Toby Mathis and Jeff Webb.
Jeff: Good afternoon.
Toby: Jeff Webb is recovering from a very hectic tax deadline yesterday and if you’re having that moment of panic going, “Wait a second, the tax deadline was yesterday?” Not much I could do. Well it’s never too late to pay your taxes. Hey, just let me know that you can hear me. I just want to make sure that we get a sound test if everybody can hear me. All right then we have a bunch of stuff to go through. I know the last few Tax Tuesdays have gone long. I’m going to try to keep these right around an hour or so we’re not taking everybody off that can’t stay for as long as we went…
Jeff: Yeah, that’s just hard.
Toby: Jeff is saying, “Hey, let’s not do it to our Tax Tuesday as much as we love to.” All right so we’re just going to jump right on in and give you guys some rules of the road. First off, you can ask live and we’ll answer before the end of the webinar. I’m going to say that with one copy unless there’s like a couple hundred questions like last week, that was crazy. You can send in your questions to taxtuesday@andersonadvisors. We will give responses to you. It’ll get assigned to folks to get answers to you before the next event and then that’s where we draw our questions.
If you do need a detailed response, then you’ll need to be a platinum client or a tax client. Platinum is a whopping $35 a month when you’re a client at Anderson. Then you can ask all the tax questions you want and they’ll answer. This is fast, fun and educational. We want to get back to help educate. You can always invite people on to this. There’s no cost to doing the tax Tuesday. We just like to talk taxes and it’s a lot of fun for us. Hopefully it’s educational for you guys.
Now we have a lot to go over so we’re just going to start jumping on in. the questions that we’re going to go through tonight and I know they were emailed out ahead of time, but just in case you haven’t seen them. First one is about loaning money to a C-Corp and they’re planning on closing it. I’m going to go over some of the rules. They did ask, it does seem like they’re asking about $80,000 to creditors. If you loan the money, you’re the creditor. So we’re going to talk about what you do with that.
Someone’s talking about vacation rentals with rehabbing I wish I could actually follow up and ask a bunch of questions of them. But I think I see the point of the question and there’s a couple different answers depending on the facts. If you form an LLC to collect rent, the LLC is owned by the corporate world, there’s a corporation who could play. We’ll go over that one. Somebody’s asking about taking a real estate training and investing company or training using their company credit card. The company is software development and it does portfolio management, can I deduct the courses. The last question is about vehicle owned by the company and this is a fascinating answer because we get to talk about something called Section 179 Recapture which is when you dispose of an asset before the end of its useful life and since we’re talking about cars, the useful life on a vehicle is five years.
So this is going to fall squarely within those rules and we’ll give us a chance to get real tax Kiki on you which is fun. At least fun for us. Let’s see this someone says, platinum is the best value out there. Hey, I love that. It’s better than, hey, platinum stinks. Platinum is actually really good. You ask questions with the attorneys, ask tax questions in writing and we get back to you.
Jeff: And you get access to a lot of information, right.
Toby: You get access to a ton of information on the site, it is one of those things where it’s crazy cheap for what you get. That’s called value and we also call it an only viable option. There’s nobody out there that has anything like it. Good luck getting answers from attorneys without charging you hundreds of dollars every time. So here is the first one, “We have loaned about $80,000 to our C-Corp. I’m planning to close our Corp down if we don’t make any money.”
So I think what they’re saying is the corporation isn’t making money. How do we pay back the $80,000 to creditors if it’s in our personal names but was for the business? So what it really comes down to is it sounds like a shareholder. So I’m going to use the terms as you would look at it legally, you have shareholders of the corporation that has loaned money to the corporations, let’s call it a shareholder loan.
And if you shut this thing down, the C-Corp, there are rules it’s called a 1244 stock collection that allows you to take a personal loss for the value of your contribution to the company in exchange for shares. So if you shut this down right now, you do not meet that criteria and what you have is bad debt and you don’t get to write off your personal bad debts because it’s not your business. Jeff, you can correct me if I am silly. Jeff looks at me over his glasses all the time and I should say this, last week I had one number wrong and he waited until the end to say, “You said something wrong.” and I was like, “Next time, interject and slap me.” We’ll go over what that was too. It’s a nuance but it’s still there.
Jeff: But this looks more like a case where they were making payments directly for the corporation for the corporation’s expenses.
Toby: Right. So they were probably paying expenses. So using a personal credit card for buying things, travel, etcetera for the company. You don’t get to write that off if you keep it personal. So what we have to do is contribute it to the corporation in exchange for shares. Now, you become a shareholder and now and only now could you do what’s called a 1244 stock loss. If you do the 1244 stock loss and you shut the company down and file its final return. Then an individual can write off up to $50,000, a married couple can write off up to $100,000 against their personal income. This is really important, this is how you do it. Otherwise, you get nothing. And before a bunch of you guys say, “Hey wait a second, you have to have made money in the company if there’s an accountant out there.”
We’ve actually had this one done with a client who made zero money inside the C-Corp, never made a dime. It was a $67,000 deduction and it was on an amended return because his account and told him that he couldn’t write it off and he said, “Hey, just give it to me. I’ll do it.” but I want you know, but we’ll handle the audit if it gets triggered because this is a pretty significant loss. you’re probably going to get at least letters asking you what was this all about, why you changed this.
So he got a letter, we wrote it back and the IRS accepted our position without a question. Because it’s black letter law, and this is what it says, if you contribute and if you follow underneath the criteria of being a 1244 company, a small business company which means less than $5 million of capitalization, the money was for the original issue of the shares which means you didn’t buy it from somebody else. All these things, all these credits, less than six shareholders which means five. All these criteria then it gets taken off. So you get to write off the $80,000 personally if it’s a married couple. If it’s a single person, it’s limited to $50,000. $50,000 against your other income.
Jeff: However, if it’s a single person, the additional $30,000 if you convert, it’s like the capital loss.
Toby: Repeat that, I want to hear that.
Jeff: So this person had $80,000 in losses. If they’re single, then they would be able to do the 1244 loss for $50,000, the remaining $30,000 is money still owed to them. So it’s a non-business type of debt which equates to a capital loss.
Toby: Which means they would just take that under—they wouldn’t get to offset their ordinary income.
Jeff: No, they would have to offset under capital gains.
Toby: Or I supposed because it’s the same thing as contributing in it and taking a $30,000 loss.
Jeff: Right. In this case, you deduct $3,000 a year for the next 10 years.
Toby: Somebody’s asking, “Would that apply if I set up a trading account under the C-Corp?” Yes, that’s actually the case that we went under with. And we won and they got tired of it. That’s a truce, $30,000 check from the IRS I got a tie. Now we have lots of questions about, somebody’s already asked the same question so I’m going to say Ms. Davis. This takes a bunch of real estate. I already saw your question. Your live questions, the ones you guys type in the question, you only need to do it once.
We are going through the questions that we have that people emailed in first and then we’re going to go through all the live questions. If you typed in your question, we will read it and go over it and answer it, but we’re going to do that secondary. “We have a vacation rental that we’re rehabbing. If we form an LLC to collect rents, so this is where I get confused.” You’re rehabbing a property, but now you’re collecting rents. In my world, those are two different business activities.
And this LLC is owned by a corporation. I would never rent a property that’s owned by a corporation. What role would the corporation play? How do the funds actually get from the customer to us personally? This is where there’s a few questions. Do you have an answer you want to give on this one first?
Jeff: Well, I think in this case we are saying that the LLC that’s collecting the rent more or less the property manager is owned by the corporation.
Toby: That might be the case in which case it should not be owned in that same LLC.
Jeff: Right. You don’t want your rentals in your corporations in any way, shape or form.
Toby: Yeah and the reason being is because, if you ever take it out, it’s considered wages. It’s like active ordinary income. But in this particular case, there’s an LLC owned by the corporation. Usually what we’re seeing is, it’s not owned by the corporation but it’s managed by the corporation. so we’ll have an LLC that rehabs and does rentals and it has a corporation that’s collecting the rents, doing all the repairs, taking care of all the expenses associated with it and then it nets out just like a property manager would and gives you the difference.
Jeff: Yeah and I think we’re used to hearing the term rehab is for people who are flipping properties.
Toby: If you’re flipping, then more power to you. The relationship between LLC and the Corp is from a tax standpoint. the LLC flows up into the Corp. so you’re really just trying to get that flip on to the corporation which is what we want because, real 10,000-foot view, you’re either an active business which is flipping, or rehabbing, or developing, wholesaling, or you’re an investor which is buy and hold for long-term appreciation. But you’re not both.
Jeff: So in a case like this. If the LLC is acting as a property manager for the rental property, they may collect the rent. They may pay certain expenses from the property. However, none of that income, none of those rents for expenses belong to the LLC or the corporation. They belong to the rental property. So what the LLC or the corporation would do is they would collect a management fee, for being the property manager.
Toby: So it would be like this. So let’s say that you have the rental and you have tenants that pay the rental cash. Then you have a corporation that’s managing and you pay some money over here. The question is, how do you get money? How do you get money? And the way you get money is, in a rental property, you’re going to be the tax owner. Meaning that I’m going to make that disregard or your partnership is going to flow on to your return. So whether you leave it in here or comes down here, it doesn’t matter. It’s still going to end up on your 1040. It doesn’t matter.
If it’s paid to the corporation, how does it get back out to you? It either stays in the corporation. the corporation pays tax on it if it’s a C-Corp. if it’s an S-Corp, then it’s going to flow down to you regardless if it’s a C-Corp or an S-Corp, it can reimburse your expenses associated with it and there’s lots and lots of ways to get money out. So I’m hoping that that is making sense. But what we know for sure is that, rehabs and flips are generally done in a Corp. Rents is an LLC owned by you. So if you really want to get down to it.
There’s going to be another question that’s asked that we’re going to break this down even further. But we’ll get all these things. We have lots of questions that are being asked too. I’m going to look at for some of the questions that are relevant to this one. They may mean if it’s a short-term vacation rental. We’re going to answer that question when we get to the Airbnb. But if it’s a short term meaning, seven days or less, then you are a hotel as far as the IRS is concerned and you want that to go into a Corp.
“If the rental is an LLC and you want to flow it to the Corp, isn’t that contribution LLC to Corp?” No. So if you want the money to go to the Corp you’re paying in a management fee. If you don’t pay the management fee, that flows down to you individually which is good. It’s rents, it’s passive, so we like that. So we want to make sure that we do know, do no harm.
Jeff: One thing we’ve had an issue with in the past is, sometimes clients don’t understand that they bought a property and they’re rehabbing this for up to a year. It’s not available for rent. So your expenses are deductible until it is available to rent. No, we don’t lose those expenses, we end up capitalizing them. Including in the value of the property but, just keep in mind until you’re able—you don’t have to actually be renting them but you have to be advertising them for rent.
Toby: There is a great case, the Woody case where there was somebody taking expenses for education involved in real estate investment which what Jeff is talking about. When you’re holding property for appreciation, the second you put it up for rent and you actually make it available is the second you’re actually in business. Before that, you’re not. That’s why we tend to use a corporation because a corporation is in business the moment it’s managing the LLC. That’s what we like to do.
All right let’s keep going on, I’ve got lots. So this is the next one. “I’ve taken real estate training and investing using my LLC’s credit card. Whose credit card? The LLC. My LLC is a software development company that is creating finance software related to portfolio manager.” I’m going to assume that portfolio might be real estate because this is going to have an effect. Can I deduct those courses? Jeff, can you deduct those courses?
Jeff: We go back and forth on this issue. I’m sometimes blurry, if there is a clear connection between your current business and education you’re taking.
Toby: Here’s the big question, is it a new business or does it help—oops, existing business. Because if it’s a new business, what’s the answer?
Jeff: The answer is no.
Toby: Then you don’t get to write it off. So if you’re creating a new business inside your company that the company is not in, you’re going to have a problem with it. If it’s your existing business or it is helping and you’re trying to help the existing business, then the answer is, yes. I’ll make this easy. No, yes, so which one do you think it should be. And again, this is why we tend to put our courses. We like to capture them as a startup expense in a corporation. Because the C-Corp is going to be an issue in the business of managing all the other entities. And so we like to capture that and say, “Hey, it’s in the investigation of the business.” so we’re going to put it as a startup expense. We’re going to grab it under 195.
Jeff: Yes.
Toby: It’s the section 195 questions, this is fun, this is really exciting because Jeff gets all excited about 179 recapture. “We’ve had the company vehicle owned by the company for almost four years.” this is important, down this little thing, four years. This is important and you section 179 to depreciate it. This is really important as well. Section 179 equals $1 million a year right now. It used to be, what year was that, four years ago, 2014 that would have been. It could be $25,000, it could be $500,000 they had some weird fluctuating numbers. It could have been whatever it was.
So you section 179 which gives you an immediate deduction otherwise it’s MACRS which is 5-year property. This is why it’s important. If you go below 50% usage, you have what’s called a recapture which is no longer business asset, you need to pay tax. The business pays tax on the difference between what it did as a 179 and what it would have received under MACRS. So the company if you take it out of the company. So they ask, “Can we take it out of the company and put it in our personal name?” The answer is, yes. “What will be the tax implication?” Company pays tax which is the difference between 179 minus MACRS. So there’s a tax implication there that could be big or small, depending on what it is. And you pay tax on fair market value of the car.
So if it goes out to you and you put it in your personal name, you have to tax it on the fair market value of that car/ don’t let anybody tell you differently because there’s no such thing as a free lunch in the tax world. If the company depreciated it down to zero, you can’t just give it to an employee, so here you go, that’s a taxable event? You just give them something, like if I depreciated a building to zero and then gave it to somebody. This is where you say, please don’t take it out of your company name, there’s a tax implication for doing so.
Jeff: Good answer.
Toby: Anything you want to add?
Jeff: No, I’m good.
Toby: All right. Questions, if you have complicated questions or you’re just thinking about one in three days and you say, you know what, I’d love to ask that question. Feel free to send it to taxtuesday@andersonadvisors.com. Now, we’re going to answer a whole bunch more questions. Before we get there though, I’m also going to give you a little bit of information on our Tax Wise Live Stream. We are doing a $97 offer this is two days of tax strategies. You’re going to want to write down tax stream because you’re either going to say, “Hey email us.” and say, “I’m interested in registering for the Tax Wise Live Stream.” or you can visit us on our website and just register for it.
I’ll show you, I think the date is like October 20th or at the end of this month. It is the 29th and 30th of October. So the next Tax Wise Live Stream, it’s two days 29th and 30th and we record it. So if you registered for the live stream, you can come to the live stream where I go over about 26 different strategies on how you can minimize your taxes and it’s a lot of fun. It’s long because we’re going into the details of how you can reach some rewards. But anyway, that’s how you do that. I’ll go back over that before we’re done today. Let’s go over the questions. Somebody says, “I missed the first 17 minutes. Can I get information?” the recordings of this are always in the platinum portal.
Jeff: Another advantage of having platinum.
Toby: Yes. So, if you want to get the recordings, then just email and somebody will get you in the platinum. It’s $35 a month. There is a sign up fee by the way if you’re not a client, if you’re not doing any of this. That’s rarely the case and so somebody will bend over backwards to get you access so you can try it out I’m sure. “Please clarify, travel meals. I’ve heard both 100% and 50% if included in lodging. Does that mean if your meals are charged in the hotel bill, that qualifies for 100?” There’s a bunch other parts to this, I’m going to answer those secondarily. Jeff do you want to answer this?
Jeff: Well, this becomes really important how you’re being billed for your travel. You could take a cruise ship, your meals are included as a part of your boarding fees, your cabin fees. If they’re not broken out, if they’re not separated on any kind of bill, then they’re part of your travel which will make them 100% deductible.
Toby: Yeah, you actually used a really cool one. Guys, you can write off cruise ships in only one circumstance and that is, if it is used for travel. Don’t even try to write off seminars on a cruise ship by the way, it has to be a US registered vehicle in US ports and you realize that that’s like none of the cruise. I think there’s one in Hawaii that might qualify. Everything else, you make it into travel to and from a destination and it’s twice the maximum federal per diem or about $800 a day. If it includes the meals, like if you get a train, or a cruise ship, or a plane, or any of these things and it includes the meal, you don’t have to worry about breaking the meal off and paying the 50%. But in a hotel, that meal was broken out guys.
You’re going to get a 50% deduction on the meals. They’re associated with that. There used to be a catering exception and the issue is always when I order food to my room, is it somehow underneath that exception. Frankly, it’s up to you, how aggressive you want to be on it. But no, not anymore. The one time that you get 100% of meals actually there’s two times I could think of. One is a holiday party for your business, you can have one year and invite your associates.
Jeff: You can do your company picnic, your holiday party, things of that nature.
Toby: Once a year. I’m going to say it I think it is that you could have one a year and then the other one is a promotion event. So if you have like a demonstration at a restaurant or you do a luncheon learn where you’re giving them a meal and then it’s 100% it’s just included in the…
Jeff: Because it’s open to the public.
Toby: Yeah, you’re doing a luncheon learn, you’re having people come in. if you do it your employees, even if you buy your flipping accountant’s pizza, it’s 50%.
Jeff: I just bought one for my employees today and I’m only going to get to deduct 50% of that.
Toby: And that’s all Jeff was thinking about. He wasn’t thinking about how awesome he is, he is thinking about 50% deduction.
Jeff: Well, I’m always thinking about food too.
Toby: And sleep, he is thinking about sleep. There’s other pieces. How much can someone loan or gift to you in a single year and not be a taxable event. In this case to have seasoning for an RV purchase upcoming and then be returned. So you’re dealing with making sure you have money in your bank account. So that’s not really a gift, that’s a loan and there’s no limits on that one that I’m aware of. If you’re gifting, then you actually can use up your lifetime exclusion. Right now it’s $11.2 million per individual. What most people are thinking about is the $15,000 a year you can give per recipient, the only recipient and your $15,000 to if I have three kids, I can give $15,000 to each one of them. My spouse can give $15,000 to each one of them.
Jeff: But if you give $16,000 to each one of them, you got to file a gift tax return.
Toby: Yeah, if you give $16,000 you got to file a give tax return using up your lifetime exclusion of $11.2 million. You’re still not paying tax but you have to do a stupid tax return. So if you’re just giving somebody money that they’re going to return, I wouldn’t mess with it. If it’s less than $10,000, it’s de minimis. If it’s over $10,000 frankly between family members, is the IRS going to crack, they could impute interest I suppose.
Jeff: We just want to make sure you don’t go over your limit, your lifetime limit.
Toby: I don’t think they’re worried about people like us.
Jeff: And remember, anytime you pay medical or tuition directly to a third party, that is not a gift, it’s not anything.
Toby: It’s a nothing. But before you go paying a tuition of third parties, pay them out of your company, let them pay tax on it, there are tax brackets. Do this all the time. For those of you guys who have kids out there, pay your kids a wage out of your companies so they pay tax on it at their tax bracket instead of you paying it. I do that, my daughter just graduated from college and I don’t have to deal with it anymore. Which is better to do an RV purchase, as personally owned or C-Corp owned?
Jeff: I think this goes back to last week right?
Toby: Interesting. They said it’s full time living and to go see […]. So here’s what I would do, I’ll just give you the answer. There’s a whole bunch of other stuff but it really comes down to yada-yada. The rule really comes down to if I have an RV, in order for it to be deductible if I had a company, it has to be 50% or more use for business. That’s going to be a really tough one to overcome. Instead of dealing with that and then if you do take that and you start writing off the RV and start trying to write it off as a big fat deduction. It’s five-year property if you fall below 50% anytime during that five years and you have to keep records on this, the amount becomes taxable to you. The difference between the MACRS and the 179 deduction bonus depreciation is a different matter.
Jeff: Well, bonus goes away.
Toby: All that stuff.
Jeff: You’re going to pay NBN.
Toby: It’s almost impossible under the situation that’s laid out that this would be more than 50% business. The better route is just to reimburse the miles. RV is big RV and I get it that they’re expensive to run and it’s not as great but if you’re driving all over the place you get, $54.5 cents a mile in 2018. Maybe it’s $53.5.
Jeff: I don’t remember.
Toby: But it’s always in the 50s depending on oil prices. The IRS sets it differently.
Jeff: Another thing people don’t always understand about RVs is they qualify as a second home. Meaning, if you have a mortgage on your RV that you purchased, you can deduct that interest as your second home.
Toby: And you can do something called 280A which means it still qualifies as something that you could lease to your company once a month to your meeting. All right, enough with that, we have tons of questions more and more. I have a C-Corp and a house under my personal name should I put the house into the C-Corp? No, that’s all I need to say. I’ll make it real simple. Don’t do that, don’t touch that. You don’t put it in a C-Corp because a C-Corp doesn’t get all the better.
If you have a house and it’s your personal house, you’re going to have a 121 to the exclusion if you sell it and you have lived in it to the last five years. You’re not going to pay tax on $250,000 of gain if you’re single or $500,000 of gain if you’re married. Even if your house is not your personal house, you can always 1031 exchange the house and never pay tax. Just don’t, and then if you put in the C-Corp, you’ll lose the long-term capital gains and if it pays out to its income. So there’s all these bad things that go on. And the depreciation is useless too. Here’s somebody that says, California C-Corp or Wyoming Investing LLC. When C-Corp is 20% partner in the investing LLC, do I need to pay state taxes in California for all the income coming from the LLC? To make sure I’m understanding it, if it’s a California C-Corp, go ahead Jeff.
Jeff: Well, if it’s California C-Corp, you’re going to pay taxes on every dime that California C-Corp makes in California. Any time you’re a resident of a state whether you’re corporation or individual, all of your income is subject to that state’s taxes.
Toby: And then they said, question on the C-Corp LLC is for stock investing. Can I still have the C-Corp management fee paid from the LLC which has been set up? The answer is yes, you would need that LLC to be taxed as a partnership and it’s already would be based off the fact you said 20% partner. So it sounds like you’ve done perfect. “Can we ask any questions about something basic.” well yes, “Can you repeat the answer those long time ago. Would that apply for a set of training under C-Corp.” I think we already answered that one.
There’s another big one. Can an LLC or S-Corp take this loss? Only an S-Corp, he’s talking about the 1244 stock loss where you can write off your ordinary loss for your contributions to a corporation when you pay in. It does not exist for LLCs. So if you have an LLC tax as a Corp, you’re not going to get to take the 1244 stock loss because it’s only for stock not for membership interest. I am the president of the corporation. I have a vice president, how do I share the earnings with her. She’s really a co-owner. If you’re an executive officer which is all you are, you’re entitled to compensation that’s it, you’re not entitled titled to profits.
So you don’t have to share any earnings. If they’re a shareholder, you still depend on the type of corporation it is. If it’s an S-Corp, the taxes flow down to you no matter what, you could choose to keep the money in the Corp. the taxes slow down to you in proportion to your ownership. You cannot do disproportionate distributions of profit. You can pay each other different salaries.
Jeff: And you can pay their salary on a share of the earnings.
Toby: Yes, explain that one.
Jeff: I mean, say that you normally pay your vice president $20,000 a year but you have $100,000 that you want to split evenly with her, you would just make her salary for that year $70,000 and she would effectively get half of the earnings. So you can’t share the earnings directly but you can do it with your compensation.
Toby: This is how it kind of works too. Let’s say that Jeff and I were 50/50 owners in a company. Jeff didn’t work and I did and it made $100,000. I could pay myself a salary. let’s say I said I’m going to pay myself $50,000 then the profit is $50,000, Jeff would get $25,000, I would get $25,000 whether we take it out of the company or not if that’s an S-Corp. If it’s a C-Corp, it’s a different model. Now, Jeff and I are 50/50 owners, I’m the only one who is doing work. I take $50,000 out, now the corporation pays tax on the remaining $50,000 if it’s a C-Corp at 21% and then we just leave it in the company. If we wanted to issue dividends, then we would do that and we would issue dividends in proportion to our ownership.
Jeff: If Toby doesn’t feel like paying me because I’m not doing anything.
Toby: Yes, I’m not going to pay Jeff […]. Except we’ll reimburse him for the lunches. “I am a self-employed life insurance…” somebody asked this. Sorry for this I came in at the tail end. The website and value of an advice from attorneys. That’s the Anderson portal, that’s the platinum portal, Dustin. So yes, I didn’t want to skip over that one. I’m a self-employed life insurance agent and also want to wholesale properties. How should I structure both businesses?
Thomas, if you are a life insurance agent, you are a licensed person. You’re going to have to follow your state’s licensing requirements as far as how you’re going to be structured. Nine times out of 10 or 99 out of 100, it’s getting closed. You’re going to be an S-Corp or an LLC taxed as an S-Corp because they want to make sure to you the license holder who is the owner and that’s the only way they can make sure. So what should be a sole proprietor or an S-Corp and there’s a huge difference from a tax standpoint. So you’re going to be an S-Corp, I’m just going to make it real simple.
For wholesaling properties, you can be an S or a C. you will not do that in your individual name. So if this was just getting started, I have my insurance business separate from a wholesale business but I may have the wholesale business. What I would probably end up doing is having the insurance agent business be an S and the wholesale business be a C depending on whether you’re getting any benefits. My guess is you’re not getting your medical and all that fun stuff. so there’s some reasons we use a C-Corp. we’re going to reimburse 100% of our medical, dental and vision out of the C-Corp, you can’t do that with an S.
Jeff: How do you normally feel about mixing different businesses to govern same entities?
Toby: If it’s a licensed business, I just never do it. If it’s a management company and you’re doing your own living or you’re doing some sort of MLM, or outside business, you’re doing consulting then I’m all for it. What I’m looking at is, I don’t want my license to get affected by something that I do someplace else. So I’m always going to separate those. So if you’re a licensed accountant, you don’t do your wholesaling in the same business. But if you’re a wholesaler, go ahead and do whatever the MLM might be, or whatever your side business is, a photography, or writing, or whatever, go ahead and do that out of the same business.
In fact, I really encourage it. You should mix up your businesses because sometimes one makes money and the other one loses and they offset each other. I have been depreciating our company works vans. Now it’s four years old, time to purchase a new one. Would it be best to depreciate again or deduct mileage? If deducting mileage what is the best practice on doing this? This vehicle is used only for LLC C-Corp. Should we sell and put the funds back in the C-Corp or use it for training. I have my strong view on this but I’m going to see if you have one.
Jeff: Well fortunately, IRS get away with trade-ins on anything but real estate. So it used to be a real issue when you traded cars for a new car. But I kind of like the idea, depending on how much you’re spending on the van and depending on the mileage. I think there’s a couple different factors I kind of look at which is better to do mileage versus actual.
Toby: It’s a company work van used 100% for work. I’m going to get to write the whole thing off this year if I do this and it’s a work van. You’ve been depreciating a straight line but you actually have the option. So if I felt like it and I’m pretty sure this is going to qualify but I’m probably going to take the deduction this year and write off and you get a huge tax benefit. Now, I’m going to trade in my previous car because they’re going to give me a low trade-in value more likely which is good for me because I’ll probably have no real game like the straight-line method is used for a reason because you’re going to have a car that’s not worth a lot after five years. But let’s just assume there’s a little bit extra there then you’re going to have a little bit of tax but a big, huge, fat deduction.
Jeff: And in regards to trade ins too, you might want to do a private sale of the old vehicle you might make a little more money but I typically don’t find it’s worth the hassle.
Toby: Yeah, but if you’re doing this 100% for business and it’s a van, I’m not doing the mileage reimburse. Now the one side, flip side before everybody runs out there and buys cars in their company, if you use your company car for personal use and it’s the company’s car and you have a taxable event to you personally for the personal use of that vehicle. See people miss this all the time, so if I have a car that’s 50% business and 50% me, company buys it, I’m paying tax on 50% of the lease value and this is not a small amount on a $35,000 car, I think it’s $9,600 a year. So 50% of that would be I have about a $4000 or $5000 tax.
Jeff: Right. That gets added to your W2 and you end up paying taxes on it.
Toby: Yeah, so you pay for self employment and others. So, I tend to do reimbursement because I can own it. I don’t really care about the business, I don’t care about whether it’s 50% or more business use or whatever. The other side to it, I’m reaching around, I’m having my blonde moment is the insurance. So if you have a vehicle in a company, expect to pay more for the insurance. It’s going to be commercial insurance and you’re bringing all liabilities into the company.
So if this is truly a company vehicle, go for it. If this is your van that you’re using to travel around and drive your family around and you’re going to do 5000 miles a year than a business, don’t do that, use the mileage reimbursement. You’re going to save yourself a lot of money in the long run. It’s not just taxes, there’s added cost. Can mileage and other expenses incurred before the company was formed be applied to the corporation. Gwen, the answer is yes. It’s called a startup expense and it’s all explorations. The ways to look at it is, anything that would have been deductible to the company as a 162 which is an ordinary and necessary business expense can be grabbed and put on there as a startup expense.
Now, you have two limitations. In the first year, you can write off the first $5000. If you have expenses exceeding $50,000, then you’re going to have to run to amortize. If you exceed the $5000, you amortize the rest at 15 years. So if there’s an incentive for you to set up your company sooner than later if you’re spending some serious money.
Jeff: And one of the questions we often hear is, how far back can I go to pick up the startup costs and the answer is really, when did you start investigating opening a new business? There’s no real timeframe.
Toby: There’s no rule on it guys. If anybody says it’s six months or it’s a year, that’s a rule of thumb. There’s no rule. I could go back five or 10 years and there’s cases where they go back by 10 years. In fact, these cases, usually it’s where they’re forcing them not that, “Hey, your business hasn’t started yet.” somebody set something up and they’re doing real estate and they haven’t even broken ground yet on a building or whatever it is that they’re doing and they’re trying to expense everything and their IRS is positioned as, you’re not a business yet.
Until you actually have the property or you started, you’re not a business yet. So you got to be a little careful. Somebody says, I have a C-Corp. can it pay health club dues for officers and directors? Yes, but it’s taxable to the officer’s contractures. It’s compensation, it’s not deductible.
Jeff: Yeah, that’s what we call our wellness program. That’s a nondeductible expense.
Toby: Unless you have a C-Corp and you have a prescription for a health club because you have a medical condition that requires its use. It’s like you have to go to a sauna or something because you have a skin condition which is just gross. Also, can a C-Corp buy a gift card from a restaurant that can be used to take clients to lunch, dinner, etcetera? Yes, but it is 50% deductible and you better get a receipt. If the company buys a gift card and gives it to an employee, guess what that is? Compensation.
Jeff: Yeah, gift cards are treated as white cash when it comes to gifts to employees.
Toby: How does the process change if the rental LLC is owned by a QRP? Gerry, I think you’re referring to the earlier question we had about the LLC owned by the Corp and it was a vacation really. So the way that it changes is, it can’t be a second house, it can’t be your vacation house because you’re a disqualified party if it’s a QRP. For those of you guys who doesn’t know what a QRP is, Qualified Retirement Plan 401K, profit sharing plan that type of thing.
Jeff: So, I would think you would be in danger even paying a management fee to another entity.
Toby: I would not do it either. I would not do it, it has to stay into the QRP. So if it’s owned by the QRP there’s a couple of things that I’m worried about. If you’re rehabbing, you could probably get away with a few. But you always have to worry about something called UBIT or Unrelated Business Income Tax if you’re operating a traditional business out of a QRP, you have to pay for them.
Jeff: Because what ends up happening is you do rehab then you pay for some expenses. You’re technically making a contribution to your QRP that you may not be allowed to take.
Toby: I love that stuff. Does a vice president treasurer, I think they mean secretary, have medical expenses applied to the company without having insurance for them. I don’t know what that question really is but I think I get it. I’m going to get my crystal ball out. I think what you’re saying is, “Hey, if you are an officer of a company, can the company reimburse you for your insurance expenses or your health expenses or do you have to have insurance.”
Jeff: Can I flip this one around?
Toby: Yup, go ahead.
Jeff: I’m going to flip this on its head and say, if you were paying any of your employees and I’m assuming you’re offshores are also employees, you’re paying medical benefits to any of your employees, you have to offer it to all your employees. So you can just pay medical reimbursement for yourself and not pay for your vice president, secretary and treasurer.
Toby: And, if it’s just you and one other person, another owner or a spouse, then you don’t fall under the Affordable Care Act and you don’t need insurance. If you fall into a less than 50, there’s an exception. I’m trying to remember the code, it was the cure act that was passed at the end of 2016 and nobody is paying attention to because we have a presidential election going on. They passed that while everybody was having a mental breakdown because Trump was getting in. what it said is, if you have less than 50 employees, then you can just go out there and get different types of plans. I don’t think you have to have the insurance but as long as somebody has an insurance, you can reimburse it.
The reason being is, they don’t want you to be reimbursed for things that are subsidized. But again, if it’s you and one spouse, you’re good. If you have other people, you have to comply with the Affordable Care Act, if it’s less than 50, there’s an exception. But all that’s required to do a medical reimbursement is that you be an employee and if you’re an employee or if you’re an officer. Whether or not you receive—pay for your time. Fringe benefits are a payment and there’s two types of Fringe benefits, there’s taxable and nontaxable.
So you’d be paying potentially nontaxable fringe benefits. If it’s a C-Corp, pay 100%, if it’s an S-Corp, it gets added on to their wages. If you’re an owner with more than 2% ownership then you get to write it off as a self employed insurance expense. So that now I feel like a geek. If the rental is an LLC and you want to flow to Corp, isn’t that a contribution from LLC to Corp? Jake, no, that’s not. If I have a rental LLC and I want it to go to the corporation, I’m usually paying a management fee.
But I want the rental to flow under my return if possible, if there’s a net amount and I’m using the depreciation from the improvement on the real property to offset the tax. So in English it means, if I make $6,000 of net income from the rents and I have $6,000 of depreciation because I’m writing off the value of the building over 27.5 years, I paid zero in tax. So we like that with rental property. With the new tax law, can I depreciate 100% of all new capital purchases for my rental? Appliances, HVACS, flooring tools and etcetera up to $1 million. Well Larry, so under 179 you can do the HVAC, carpet and things like that, but there’s also the bonus depreciation.
Bonus depreciation is different than 179 – 179 is for equipment and by the way, I’m going to put a caveat on that, that’s for commercial property where you can write off the HVAC and things like that. If it’s a rental property, you’re looking at bonus depreciation on the appliances and things like that but otherwise, it’s going to be added to basis more than likely or it’s going to be a repair. But if it’s less than a 15-year property, this year we have bonus depreciation up until looks like it’s going to be through the end of 2026. So yeah, end of 2025.
So you have 179 which is for equipment that you buy and it’s up to $1 million and then you have 100% bonus depreciation which means anything less than 15 years, you can write off. So people are going to say, “Why would you ever do 179?” yeah, I agree. You’re going to do bonus depreciation.
Jeff: I was expecting some brilliant answer.
Toby: Yeah, there’s no reason. And plus with 179, you can’t take loss so you can only write off up to your income. Bonus depreciation can trade loss if you want. So you’re doing the 100% until they change that. We’re always going to scratch our head. I think there might be a reason you know what it is, it’s if you have HVAC in a commercial.
Jeff: Well and also some the states don’t recognize bonus depreciation but they recognize 179. But that’s only up to like $25,000. This is not especially helpful.
Toby: So very good question Larry, we may have to dig into that one a little farther. Rehabs and flips are the same. Do you mean wholesale? Rehabs, flips and wholesales, and development, all of those are active income for real estate.
Jeff: You mean when we buy it with the intent of reselling it.
Toby: We buy it with the intent or we’re improving the property with the sweat of our brow to increase its value and we’re going to sell it. We buy it to sell it. I own a real estate commercial complex under an LLC. I do manage the property myself sign leases, manage day-to-day, maintenance hired a leasing agent. I was thinking of taking some guaranteed payment from the LLC starting 2018. A few questions, is this LLC with rental and income qualify for the 20% pass through? How is guaranteed payment reflected on my K1, I guess ordinary income. So, Mangeet, here’s the thing.
Real estate commercial complex if its triple-net lease, it’s not going to qualify for the 199A, the 20%. If it is not triple net which it sounds like, it sounds like you’re very involved, then you get the 20%. Now you have some phase outs though that we have to be aware of, depending on how much money you make. So there’s three tests that you end up using. Your taxable income, you look at the W2 wages that are paid out of the company and you look at 2.5% of the basis of the property, unadjusted basis. That will tell you what’s the amount that you can actually write off.
Jeff: But if we convert rental income into guaranteed payments, aren’t we really subjecting ourselves to self employment tax?
Toby: I don’t know. I’m trying to get my head around this. There would have to be other partners in this Mangeet and chances are, I wouldn’t have you getting a guaranteed payment out of a passive vehicle. I mean I suppose you could, but then you’re going to have self employment income on it. I guess you could find a retirement plan but more than likely, what I’d be doing is I’d have you set up a corporation that you operate through. Leave your interest in the LLC as passive and then contract with the management corporation to do all the management activity.
In that way, you have a buffer between you and the actual management entity and you could still do all the same stuff that you can do better stuff because you could actually be considered an employee of the corporation which means you get something called an accountable plan that you can enter into which is a huge tax benefit but that’s a topic for another day. I’d actually encourage you to do the—I’m going to actually hit this. You’re going to want to come to the tax wise and you’ll learn why that is important, to do the accountable plan.
It’s one of the huge, most misunderstood tax loopholes I wish more accountants understood it because we have everybody in an S-Corp or a C-Corp rather than what you’re doing right now. This is a lot of so sole proprietorship. You’d understand the difference between being employed and not and it’s going to save you money and self employment tax and it’s going to save you and allow you to gain more money under 199A, the 20%.
As far as a retirement plan, I’m going to go back to this. How can my LLC with huge rental income help? For a retirement plan, you’re going to need active income. So you’re going to set up a corporation, you pay it to the corporation. The corporation’s going to adopt a 401K profit sharing plan and maybe a defined benefit depending on how much money you make and how much money is being generated. We can pretty much get you tax free income on the first 18$,500 if you’re under 50. $24,500 if you’re over 50 per spouse if there’s two of you. If there’s one of you, then we can get that plus 25% of any salary you pay yourself.
So there’s a bunch of things we can do. This is one of those things where we’re going to have to sit down. “I have a C-Corp registered in California. I have as of yet done no deals of any kind. I have some very possible deals coming up in Atlanta. How can I do this? My son-in-law in Georgia wants to be a member of my company and start an LLC in Georgia. How could this work out?” Dale, it depends on what you guys are doing. If you’re flipping houses, then the C-Corp is fine. If you’re developing, a C-Corp is fine. If you’re wholesaling, a C-Corp is fine. If you’re buying and holding, C-Corp is not fine.
If you’re going to do this in Georgia and you have a Georgia LLC, the easiest thing to do is to have your interest held by your corporation and your son would own his interest, he would probably own it through a corporation himself, if you’re flipping. You don’t want it to come to them personally. In that way, you could deal with it. Let’s see, “Is there a dollar amount limit to startup expenses for education and training courses for the C-Corp?” Yeah, the dollar amount is just startup expense which is $5,000 for immediate expense and then amortized over 15 years.
Jeff: The numbers from – not limited as double, how much […] you can have.
Toby: No limit, you can’t have $500,000.
Jeff: If you look at some of these public companies, they have started expenses in millions of dollars.
Toby: “My condos roof development has a bad leak and my association took eight months to fix. It cannot be rented during that time. Can I declare as rental for the whole year? I wanted to rent it even though no one would move with the damaged ceiling. So would that still be rental?” I don’t see why not.
Jeff: Yeah, because you were not yourself saying it was unrentable. This is a good time to have business insurance it covers also the income.
Toby: Yeah, and Michael, if you had rented it before and you bought it and it had this problem, it’s a rental. If you went over 14 days and you didn’t live in it, it can be treated as a rental anyway.
Jeff: Yeah. We run in cases where it’s been rented and the renters knew about it and then you take it out of service for six months because your last tenants destroyed the property. That can sometimes be an issue.
Toby: “If I buy a house subject to rent it out. The income on the property, does it go towards by person or business?” It goes to the owner, the personal. There’s one exception is if you buy it subject to and then you rent it to an entity than it’s rented, but that’s not what we’re talking about here. So it’s going to be you Joseph. Unless you put it in the LLC which if it went to the LLC and have them do the subject to, you could do that.
“On the start of expense inside a corporation, can the corporation be started in a later year as the expenses?” Yes. “Can Florida CPA get continuing education credit for the two-day live stream?” Bill, we can look at that. We have had many of our courses granted credit. so I would send you to email me and we’ll send you, I have a staff member who gets the approvals on those I’ve taught COEs, I’ve taught continuing education for accountants and for real estate agents and etcetera. So we have lots of our courses have been improved and if you’re doing tax wise I can say pretty much 100%, then yeah, you’re going to get credit.
“Alaska cruises are also US.” correct, they are US and you’ll notice that they always stop in a foreign port that’s just something about the registration as well in order for an outside non-US vehicle, you have to stop at a foreign port. So you’ll always see it stopping, if its Alaska it’s going to stop in Canada. Either in Vancouver or in Victoria. “I set up a C-Corp, my husband has a regular salary but I don’t. I am a shareholder of the C-Corp and I’m in need of funds for my trading account. Can he loan the C-Corp money as a shareholder loan? Does that write off for our marriage financial tax or do we need to list him as a shareholder on the C-Corp?” You don’t have to list him as a C-Corp owner.
Jeff: I think this goes back to the 1244 question. Only one of you have to be a shareholder in that corporation. But if you’re married, even if your spouse isn’t a shareholder, you still get the $100,000 if you have that much of a loss.
Toby: I don’t think they’re looking at the write off. I think is they’re looking at, she wants money so she can find her trading account. So I think she’s looking at how to get the money out of the Corp and the Corp technically could loan you the money, you document it and pay an interest. “Is the Tax Wise Live Stream free to existing platinum members?” it can be $97 for two days. If that’s too much for you guys, I’m going to give you crap. I’m just teasing.
The live tax wise you can get as a platinum member. So you should contact your representative to see whether that’s you. “If I want to buy a property for a long term investment in the US by selling a property abroad, how can I structure the sale? Money transfer, business structure to pay the least amount of capital gains.” You have two tax jurisdictions. If you’re here in the US and you sell property abroad, you’re paying tax here in the US on it anyway. You can’t 1031 exchange through foreign property in the US property. It’s kind of annoying and then this is assuming that you’re US citizen. It gets a little complicated if you’re not.
Jeff: So you’re going to exchange a property in China for a property in Timbuktu, you just can’t exchange it for a property in Jacksonville, Florida.
Toby: Yeah, well I couldn’t do it 1031 exchange, it’s only here. But if it’s overseas, I don’t think there is a 1031 exchange. I’m not familiar with it. It depends on the jurisdiction, so we have to look to see whether there’s a tax it, but chances are you going to pay the gain here in the US.
Jeff: Now, we had a really weird situation yesterday that somebody inherited a property overseas and then sold it. Well, where the property was, they don’t recognize that step up in basis on the property so they taxed him. However, in the United States, we do recognize it and he had a loss on the property. So he paid all this money to the foreign country but he gets no benefit out of it here because he didn’t pay and had a gain on it.
Toby: There’s lots of folks that that go overseas and I’ve dealt with a lot of people that own real estate all around the world, you’re dealing with two taxing entities. You’re dealing with the US and you’re dealing with the foreign. The US, they treat our citizens as though anything you make anywhere in the world, we’re going to tax it. Other countries don’t do that. But if they do tax it, usually you get a credit depending on our treaty but if it’s already stepped up in basis, your chances are you’re going to sit there with a fat loss.
“I manage 10 plus single family houses. Can I deduct when 100% of cell phone and internet expenses?” VV, if you should be doing that through a corporation and the answer is yes. If you’re doing it as a sole proprietor, you could write off the business portion of the usage and you actually have to track it which is a pain. So set up a corporation and quit making it a paint. “Please explain imputed interest.” if I loan money to somebody over $10,000, then the IRS says whether they pay you interest or not, we’re going to treat it like they are, you’re going to have to pay tax on that interest that they should have paid you. Is that fair?
Jeff: Yeah. It falls under the below-market rules that you got to pay some interest. You got to loan, you have to pay some interest. Two years ago, the interest rate was I think a 1.4%. now, it’s 1.09% and I think now it’s even higher with the new year, it’s probably around 2% but a lot cheaper than you’re probably going to get at the back.
Toby: Somebody says, “What if you loan money to your LLC, is there imputed interest? If the LLC is owned by a husband and wife or can you pay interest when the loan is repaid?” so Eva, if you are putting money in your own LLC, that’s not a loan. If you are loaning money to a corporation as a separate taxpayer, now you have imputed interest. You can’t impute interest to yourself but if it’s a separate taxpayer, then you have imputed interest.
“Is there anything in particular that we need to do in order to use the new 100% depreciation for a premise to single-family home rentals?” No, but Kim, the 100% depreciation—I’m trying to think of on rentals, there’s nothing there really. You’re talking about single-family rentals, what you’re probably going to be doing Kim is cost segregation. You can do that on rentals now and cost about $300 and they’ll say like the roof might have five more years left and in a year it rapidly depreciated, you’re going to get much more bang for your buck and then also repairs are 100% deductible. In the safe harbor, it’s less than $2,500 invoice is automatically going to be a repair instead of an improvement. So you get to write that off 100%.
“In California, if I put rentals in an LLC besides the $800 registration fee, do I have to pay tax on the rents collected?” Yes, it depends on whether there’s a net rent. So that $800 and the registration fee is the franchise tax, then it’s the minimum. If you make too much money then you might be paying more than the $800 if you make, I don’t know what the threshold is going to be but it’s going to be—you have to make quite a bit of money.
Jeff: I think it’s about $500,000, it goes up to like that.
Toby: Yeah, so you can make a ton of money. You’re not going to pay tax on…
Jeff: And again, it depends on how your LLC is being taxed.
Toby: If it’s rentals in an LLC, that falls under your tax return and you reside in California, yes. If you don’t reside in California, still yes but only on that portion that is the net portion.
Jeff: If you’re an S-Corporation, they have a very low tax it’s like 1.2% or something like that. Corporations in California pay about I think it’s 8.8%. So yeah, he may be paying some tax.
Toby: Thank you. “What about the space rental when you are at location specifically for our EI, would that be lodging?” Space rental.
Jeff: Like booth rental or?
Toby: I think Arianne is a resident—real estate investment. I think what you’re asking is, what if I rent a hotel or something, or Airbnb, or whatever when I’m looking around for an investment property. Again, I always set up a corporation and try to run through that. If you don’t, then as long as it actually has properties, then you’ll be able to write off those types of expenses. If you don’t have properties in the LLC, then you wouldn’t. Does that make sense? You have to have the properties before you get to write it off.
Somebody says, “I made $300,000 this year in W2.” congratulations. “Includes a salary bonus and RSU gains. If I buy a commercial property before December can I get depreciation resulting to tax reduction on my total W2 income?” the answer is, yes. You would get a portion I think if it’s less than six months, do you get any?
Jeff: If you buy a property in December, you’re going to get a half a month of depreciation. It’s going to be really low.
Toby: I’m not certain on that one. I know that you get something but I think if it’s in the last part of the year, some funky rule, I’d have to look at that.
Jeff: Not for real estate.
Toby: For real estate we can get it?
Jeff: Real estate, it’s based on…
Toby: Something is going, tut-tut in the back of my head. But you get some. If you really want a big tax deduction I’ll tell you the way that you’re going to do it is you can either have to get charitable and look at maybe doing your own in getting lumpy. We call it, hey, whatever you’re going to give out over the next five years, just do it all this year and offset that big fat bonus. Or you can look at things like conservation easements where you’re trying to get a deduction for investing in things that are going to create big deduction for you, or you’re going to do the real estate side where maybe you have some significant expenses in the first month where you have deductible expenses.
Jeff: Or you can set up a private foundation.
Toby: Yeah, he could do that. There are some ways to do it. There’s other things like without having a business, you’re going to be really tough. So the fact that he’s got the W2 doesn’t look like he’s got other business. It’s going to be tough. this is one that we have to sit down and look at, “Can you deduct food expense, coffee shop, cafe when going there to do office work for your business on your laptop?” if it’s your business, the answer is yes. If they’re doing business, you’d actually have to have somebody there that’s actual business meeting. It can’t be entertainment. They’re doing this weird thing that I think I actually may have misread this. so they’re going there to do office work so it’s like going to a Starbucks and they’re going to be on their laptop, then it wouldn’t be deductible.
Jeff: Yeah, the new meals rule, we can’t even call them meals and entertainment anymore. The new meals rule says, not only does it have to be a business purpose but you have to be conducting a business that has the potential of generating income.
Toby: So if you’re there, you’re not there with somebody but you’re there and you’re on the phone using it as your office, I haven’t really thought about that.
Jeff: I’m the conservative guy.
Toby: You’re not paying rent, you’re just paying for your coffee you’re probably not going to get to write it off but…
Jeff: You have to eat.
Toby: I know but I always look at it as like, you know what’s going to happen, I can’t tell you what to do but I can just say…
Jeff: Did I mention I used to work at a diner.
Toby: Yeah, I know. I’m not going to say anything. All right, these are de minimis amounts. I never claimed like don’t go anywhere by yourself, how about that? Make sure you’re there discussing business with somebody. This is actually a really good one, “I never claimed depreciation on real estate rental purchase 10 years ago. Should I file amended returns to claim the depreciation and just start now? Should I use improvement value now as the basis calculation?”
This is a weird one because depreciation is a may, you may take depreciation, but you don’t must. But when you sell it, depreciation recaptures a must, even if you didn’t take the depreciation. So this really stinks because you didn’t take depreciation but you may have to pay tax on its recapture even though you didn’t take it. Did I say that right?
Jeff: You said it exactly right.
Toby: So Paul, this is where you reach out to us and you’re going to become really good friends with an accountant, because we’re going to go back as far as we can and we’re going to see what we can do for you but it can be really bad. That stinks. It’s off the basis, it’s not the improved value. We’re going to be looking at the amount that you paid for it. So “Does a LLC taxes S-Corp, it’s better than a straight S-Corp when doing license business.” Thomas, not necessarily. It always depends on the type of business. All I know is that we’re going to probably be an S-Corp.
I’m old school, if it’s an S-Corp, I’m setting it up as a Corp. there’s lots of people that say, “Hey, there’s all these great benefits of the C-Corp.” look, if it’s your business, I’m not going to screw around with it. I’m probably going to be the S-Corp. I actually want to have the shares, I want to have the ability to take the loss. So, “Is a C-Corp the best strategy for trading in financial markets in tax purposes?” Marcel, usually the answer depends on how much you’re going to make. If you’re just looking for expenses, C-Corps are fine. If you’re going to make a bunch of money in the market, then you’re going to want to have an LLC taxes a partnership with the C-Corp as its manager and partner.
So the way to look at that is, I can no longer deduct management fees on my schedule A on my personal return as an itemized deduction. I you lose all of that. In making good money in the market, I want to make sure that I have a partnership where I’m paying the corporation as a guaranteed payment partner. “I live in California and I’m considering purchasing my first property in California. I know, I know, should I purchase in my name and then transfer title to my trust?” if it’s your living trust, yes. “Note: I’ll be setting up a trust. I have not done so yet.” You should set up the trust beforehand, thank you. Other than that, you can just go ahead and buy it and cry.
Actually California’s fine, it’s is still going to be going up everything I see says it’s going up double digits over the next few years. There’s just a lot of people there, especially if you’re near the coast. The living trust will not trigger Prop 13. You don’t have to worry about that and you can set it up later. It will have no impact on you. Either from a homestead exclusion, or from a 121 exclusion, or from a property tax issue. Somebody say, “My entity corporation is in process. I took trading classes and currently I’m licensed as a realtor in California. Do I use the education for trading on another entity or can use the C-Corp that is in process?”
You write it out through the C-Corp that’s in process because I don’t think that if you took training classes as a realtor, I don’t think you’re going to get to write them off. We talked about that one at the very beginning. Well we have a few more and then we’re going to get knocked, and we’re already over. “I’m closing on refi in my personal home in North Carolina. Friday this week, I have a C-Corp with Anderson. I’m planning on creating an LLC with Anderson. I want to do a quick sale to place it in the LLC. I plan on living and set the property up for Airbnb. How many ways can I maximize the benefits of the property being in the LLC?”
Jeff: So is he saying this is not going to be a personal residence anymore?
Toby: I don’t know, Robert, that’s really interesting. What I would say is email us that because we’re going to have to sit down and dissect it because Airbnb is a hotel. And if you’re doing that as your individual home, you’re bringing some liability on to your home, you’re going to violate your homestead exclusion in almost all cases. It doesn’t mean it’s bad, it just means that we want to be very careful and that you want to go on with your eyes open, spell it out. I don’t think I would sell it to an entity.
I don’t even know if I would put it in an entity. What I might do is lease it to a corporation that then is the property, what do they call it, the host with Airbnb. So I may do it as a long term to the Corp and let the Corp do the short term rentals. In a worst case scenario I’m really worried I’m putting that property into the LLC just to keep the liability, isolate it. Here’s another one, “I have been in business for 26 years profitable I would like to cut back as much as 80%. Is there any reason I should close down and restart?” not necessarily, it depends on what type of business you are.
Scaling back is not about issue. It all depends on how much money you’re making. if you’re doing this as a sole proprietor, then I don’t even want to tell you how much you probably overpaid in taxes but hopefully this is a business and I’m not too worried about looking back. It’s not going to affect you. “How would tax situation work for each day quarter trust LLC individual if trust owns a multi-unit residential building in Illinois or California with the beneficiaries.” A trust owns an apartment complex and its beneficiary is an LLC or other things. AJ that’s just, it sounds like a partnership to me. So how would it work? The trust would be kicking down. So it’s either an irrevocable trust.
Jeff: Yeah, I’m guessing it’s an irrevocable trust.
Toby: You’re going to get K1s and you’re going to get taxed at your individual.
Jeff: Yeah, it gets into the whole thing whether it’s a simple trust or a complex trust. But the income is most likely going to be passed on to you to report on your tax return.
Toby: We want it to be because anything over $11,000, you’re getting hit at the highest bracket, so we don’t want that. “What is the best way of not being treated as a dealer when wholesaling?” I would make sure you’re an S-Corp or a C-Corp, that’s it. You don’t want to be the dealer but the corporation can. “Are reach taxes qualified dividends?”
Jeff: No.
Toby: Jeff is right on it. How do they tax?
Jeff: Their tax is ordinary dividend and one of the problems if you’ve ever gotten these corrected 1099 from your broker that’s probably because somewhere you’re invested in a [REAP 01:18:11] and they don’t have to report their income until May 15 if I believe.
Toby: Yeah. I think you get the 20% deduction the 199A deduction if you’re not phased out. So you might get a deduction on it but it’s still going to be income. It’s not a qualified dividend.
Jeff: It’s not a qualified dividend.
Toby: So you’re just going to get taxed as ordinary but it’s still passive. “Can I use bonus depreciation for residential central heating and air conditioner that I spent $5,000 on or do I need to depreciate it over 27.5 years?” I think that one’s for you.
Jeff: Didn’t this come under the new rules where they’re allowing the…
Toby: I know that you can do that on commercial. This is residential. I’m imagining that if it’s less than 15-year property, you might be able to take it as well.
Jeff: Yeah, they made some changes along HVAC, some additional changes.
Toby: We’ll have to look at that one Ken. What we may do is grab that one and do it in two weeks. So if you’d be willing to email that into, so that we can actually get it assigned out we’ll do the research on it. “Our mom’s condo exchanged to put into three siblings names that was a mistake. She’s in a group home now since we sold her condo and had to play the game. Should put it in a trust?” No, what you should have done Cathy is really kept it in her name unfortunately. She would have passed it with a step up in basis. If she was living in it, then she should have sold it within two years so that you may be able to go back except the 121 exclusion is only if you own it and lives in it for the last two years as your residence, or two of the last five as your residence. This stinks.
Jeff: But I see this situation encouraged a lot due to Medicare situations, payment of medical bills and things of that nature.
Toby: Still the look back.
Jeff: If it was transferred to you, we’re assuming that it was gifted to you and your siblings, you’re going to have the same cost basis that your mother did. You’re not going to get that step up to the current fair market value.
Toby: If they bought it.
Jeff: If they bought it.
Toby: Then that money made a difference. She at least had to step up and they could have been paying mom an income stream. The problem is, it’s going to keep her disqualified from Medicaid.
Jeff: Yeah, so if she bought this house 50 years ago for $50,000 and it’s now worth $500,000, you’re going to have $450,000 of gain.
Toby: It sounds like they already had.
Jeff: What if one of the siblings made this her primary residence?
Toby: It wouldn’t matter.
Jeff: It wouldn’t matter.
Toby: Unless they have lived in it for the last five years and they sold it. They would get that portion, they would get to $250,000 unless it was two of them. Unfortunately, this is a situation where you’re not going to get a step up from basis. And you didn’t get to use mom’s exclusion. What you can do in some of these is if you guys have rented it out, and I’m not certain that—I can’t go back in time, but if you had rented it out and then sold it, we could have done a 1031 exchange and avoided the tax as long as you guys reinvested it in real estate. This is always a tough one. There’s so many different facts on it.
“I have a C-Corp set up to wholesale. I started driving for Uber lift to keep earnings for my direct marketing campaigns. I use my business, CIM business banking for the payment of these gigs. I will likely only close one real estate deal before the end of the year. So most of my business activities will be from gigs. Is that okay and that I’ve done from that tax standpoint?” So you’re doing all that inside the corporation I assume.
Jeff: I assume that the earnings are going in there too.
Toby: Yeah.
Jeff: It’s hard to deduct expenses if their earnings are going somewhere else.
Toby: Yeah, so the earnings have to be pointed towards the Corp. the Corp would probably be in that state. I’m not sure how lift in Uber feels about Corps. You might want to make sure that they’re paying your entity. “Home state house rented out due to extensive travel. What is the best way to manage this property.” If you’re traveling a lot and you’re making it into a rental, I’ll put it in an LLC. It’s not really going to have much of it. You’re going to start depreciating, it’s what’s going to be the good part to offset that rent. “I may have misunderstood. If I’m using my QRPs to purchase a rental LLC and purchase a rental property, can I not use the same QRP funds to repair the home to pay rental Management Company, pay property.” Yes, you can Gary.
Jeff: As a matter of fact, you have to do it.
Toby: Yeah, you can personally do it. All right let’s see we’re going to get through these last few ones, “If I hold properties in my own name going out of town to buy more rentals, didn’t buy after the trip, I’m going to write it off as a startup expense, or do I have to have an LLC to write off?” So somebody owns their properties in their names, they’re going out to look for more, can they write off the mileage in the expenses of going out investigating to buy more rentals.
Jeff: Yeah.
Toby: Yeah, you write it off on your schedule A. “Would a link be available for the full webinar are later today this week?” it should be. What we do is we break them down, we put the entire recording in the platinum portal and we break off pieces and put it on our YouTube channel. So if you want the full one, you go to platinum. If you want pieces, you go to YouTube and usually we take four questions out and do that. “Which package do we have to get with Anderson to not worry about tax issues and questions.” you just become a platinum and a tax client. To be a tax client, contact your rep.
We have one package $2500, it’s basically a retainer then it gets you to your tax review and then you’re part of the tax group and then depending on your need, they’re going to meet with you periodically and go over the steps. I would be proactive with the tax department say you want to have meetings and I actually say do it, not a week, two weeks, three weeks prior I would actually schedule it months in advance to make sure that they know what’s coming. They get very busy just because we just happen to be a very busy business. Sherri, I will see you when you get here. Looks like you’re going to be in town. “If we would like to own a house in Florida and want to keep both house…” this is hard for me to understand. “I like Florida, but we may need to keep the house in Georgia. Tax wise, which is better with our home based business, what is your opinion?”
Jeff: Well, you can’t buy a house in Florida and keep it in Georgia.
Toby: So they have a house in Florida and a house in Georgia. You can have both which is better. If your home jurisdiction is Florida, you have no income taxes. Georgia I think has an income tax. What’s better? Florida. Florida also as I’m at a homestead. For a home based business, it’s going to be the same thing. I’m probably looking at Florida. You don’t have any ALS tax.
Jeff: And typically, you’re going to need more days in Florida to say you’re a Florida resident.
Toby: Somebody says California sucks in taxes. “Is it better to have a trading account through a corporation in my personal name?” I’m going to say corporation if you want to have business expenses. Usually it’s going to be an LLC taxes a partnership with the corporation as its general partner or as a manager. It’s going to get you a guaranteed payment as a partner. So you’re going to get to write that stuff off. It’s the only way to get it. “I spent $50,000 on lease improvements for my new office by S-Corp. how do I treat that in my taxes?” If it was this year, I think you’re in luck. It used to be that you have to take it over time. You have to include it to your basis. Now, I think you can write it off. But it’s always different and I think it’s different whether if it’s for an office versus if it’s a restaurant. Is that accurate?
Jeff: Yeah, for the qualified leased home improvements or restaurant improvements.
Toby: I have someone saying, “I’m going to move to Florida.” all right let’s see we have a couple more then I’m done. “To move a 401K from a previous job to a 401K solo, do I have to come out of my pocket for the fees to create the C-Corp and 401K solo?” Thomas, yes. But what you do is, you come out of pocket put it on a credit card or something, then you borrow the money from the 401K to pay it all back and then you pay your 401K back overtime. So yeah, you’re borrowing it but you’re borrowing it from yourself.
Jeff: It’s a deduction for your C-Corp on top of it.
Toby: We’re trying to give you some sneaky ways. But once it’s in that 401K, you can borrow up to $50,000 or 50% of its value whatever one is less. That’s per spouse or per participant. Yeah, meals 50%. Paul, game tickets are no longer entertainments, it’s gone. US citizens property used to be my prior permanent residence, this is the one about selling abroad I think we hit on that. “I own California single-family homes and land trusts in the beneficial interest of Wyoming LLCs. These LLCs are owned by a Wyoming holding company. The Wyoming holding company is owned by my trust. If I die, will my children receive a step up in basis?” Allen, yes. If this is flowing down to you, then that’s not going to make any difference.
“I apologize for this question. Can you please repeat how to have a CPA reviews taxes.” You become a tax client. So you just contact Anderson. Go on to our website, email this Tax Tuesday or visit Anderson, you can request a consult. Call anybody that’s your representative here in any case, you can just go to Anderson Advisors and say you request a consult and we’ll give you all the run down. We don’t charge for consults like that. We’re just trying to make sure that we’re serving you the best way and that we’re a good fit. The first thing they do is a 2-year review. If you joined platinum, they’re going to do a 2-year review period. And they’re going to look at your past actions and see if we can find you any money.
Jeff: Quick correction from last time.
Toby: My correction, yeah. I said if you had stock, you could give up to 60% of your adjusted gross income. I was mistaken on that one. It’s 30% on appreciated stock. It’s 60% on appreciated real estate held over a year but stock is, I just blanked on it. You only can write off up to 30% of your adjusted gross income. What we’re saying is there is somebody who had some significant stock that had gone up in value and they were worried about paying tax on it. And they said, “Hey, you could actually give up to 60%, offset 60% of your income by giving it to charity.
It’s not quite that, you don’t lose anything, you just have to carry it forward but your capped 30% of your adjusted gross income. There was quite a few other questions that we have to jump on. There’s people already distributing those out so a lot of you guys asked questions under the taxtuesday@andersonadvisors. We answered a bunch of them. There’s a few that are still lingering around out there. We’ll get to hammering away at those. We’re going to sign those out and make sure that you get answers. We’re gone way beyond our hour. So we’re going to say Sayonara for now. Thank you and we will see you in a couple of weeks at the next Tax Tuesday.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.
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